If the last week is anything to go by, 2009 is set to provide just as much drama as did the second half of 2008. A severe global recession and tougher access to credit promise to send the New Zealand economy into a renewed downturn.
Any early optimism in financial markets has quickly been hosed down, sending the New Zealand dollar 10% lower in the last week, while wholesale interest rates have continued to plunge in anticipation of further deep rate cuts by the RBNZ.
For our part, we have significantly revised down our OCR forecasts, and we now expect the cash rate to hit a record low of 2.50% by the middle of the year.
Towards the end of last year there were some moot questions around the economic outlook, namely: would NZ consumers save or spend their cash windfalls from lower petrol, interest rates and taxes; how severe would be the job correction in NZ; and how badly would be the contagion in our Asian trading partners? All of these questions are being resolved adversely for the nearterm economic outlook: households are saving, a third of firms are planning to reduce staff levels, and Asian exports are plummeting.
Recent news from here and elsewhere demonstrate how quickly the economic outlook has deteriorated. First, the Quarterly Survey of Business Opinion for December put some hard numbers around the mounting anecdotal evidence of how much NZ businesses are struggling – and those numbers were extremely ugly. Own-activity expectations were by far the lowest in the history of the survey, while most of the key activity indicators were close to or below the levels seen in the 1991 recession.
Firms said that they plan to ride out the downturn by delaying investment and shedding staff – steps that may be prudent at the individual level, but when done en masse will add to the fall in domestic demand.
